Question proposed, That the clause stand part of the Bill.
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The story that leads to this clause begins most directly with the VAT small business review that was published on 24 October last year. The proposals in the consultation document followed a wide-ranging view of the VAT policy towards small businesses to see whether special arrangements could be provided for them. The review was announced in the White Paper entitled "Building Businesses … not Barriers".
A major concern expressed by small businesses and often expressed to me directly in letters from hon. Members enclosing correspondence from constituents, is that they often have to pay VAT to Customs and Excise before they are paid by their customers, who frequently take long periods of credit. A further concern was that they were obliged to complete and pay four VAT returns a year and would prefer a system more akin to that for other bills, such as the rates, with regular advance payments. The changes proposed will overcome these problems by helping with cash flow and budgeting, and thus ease the VAT burden on small businesses. The consultation exercise that the Government asked Customs and Excise to conduct last October was wide-ranging. Not only were responses received to the consultative document from 192 trade bodies and individuals, but the views of small business were canvassed directly. A question and answer leaflet was sent to 5,000 randomly selected small businesses and 1,256 were completed and returned. The consultative document and leaflet contained a package of proposals targeted specifically at assisting the small business and included a scheme for cash accounting and a scheme for annual accounting. The overwhelming majority of respondents welcomed the small business review and, in particular, the proposals for these schemes. There were, and this is the purpose of consultation, suggestions for change to the proposals for both schemes. The most important of these was about the higher limit to allow more businesses to use the scheme and that in itself was a commendation for the principle of the schemes. Other suggestions concerned the detailed operation of the schemes. All these suggestions were carefully considered by the Government and many have been accepted in whole or in part. The result was the Chancellor's announcement in his Budget statement about the introduction of schemes for cash accounting and annual accounting. Clause 11 provides the enabling provision for regulations to be made covering the cash accounting and annual accounting schemes. The scheme for cash accounting will give a small business the option of accounting for VAT when it receives payment rather than when it issues a tax invoice. This will give automatic bad debt relief to businesses using the scheme. Similarly, it will be able to reclaim the VAT that it has incurred on its purchases only when it make payment rather than when it receives a tax invoice. Under annual accounting a small business will have the further option of making one VAT return a year rather than four as at present. Businesses choosing to use that option would make nine payments by direct debit on account and a tenth balancing payment would be made with the annual return. This enabling clause tells the House little about how the scheme will work, and the conditions for their use. Those details will be contained in the regulations. As I said on 8 April in a reply to my hon. Friend the Member for Berkshire, East (Mr. MacKay), the regulations for cash accounting will not be made until the necessary Community derogation has been approved. A draft of -.he proposed regulations has been placed in the Library and copies have been sent to trade bodies. The regulations for annual accounting will not be made until next spring and again a draft will be sent to trade bodies before they are made. As the Chancellor announced in his Budget statement, the schemes will be open to businesses with an annual turnover not exceeding £250,000. That represents a considerable advance on the £100,000 which was originally proposed in the consultative document last October, and covers over half of all the businesses that are registered for VAT. Once admitted to use either scheme, a business will not normally be required to leave until its turnover has exceeded the limit by 25 per cent. to a figure of £312,500 in a year. Cash accounting will be available to businesses registering for VAT, as well as for existing registered businesses, but for annual accounting a business must have been registered for at least one year. The regulations will also detail the other conditions to be satisfied for Customs and Excise to give approval to use the schemes and the circumstances in which use of the schemes may be withdrawn. Refusal to use a scheme, or the withdrawal of an approval, would be appealable to the independent value added tax tribunal. The regulations will state the procedures to be used by a business on entry, while using, and on ceasing to use, a scheme, and will be framed to take account, in whole or part, of many of the representations received. Those for cash accounting especially meet the points that have been made about leaving the scheme and receipted invoices. Subject to the necessary derogation from the Community, cash accounting will start on 1 October 1987. Annual accounting will start in the summer of 1988 when the necessary computer reprogramming has been completed. Broad details of the scheme will be available from local VAT offices at the end of May. Further information will be contained in a leaflet that will be sent to all businesses with the July, August and September VAT returns. A business wishing to receive the public notice, which will give the conditions for joining and using the scheme, will be able to return a tear-off slip to its local VAT office. A business wishing to join, having read the public notice, should complete and return to the VAT office the application form which will be part of the notice. Provided that the conditions are satisfied, approval will be given to use cash accounting from the beginning of the business's net VAT accounting period, on or after 1 October.I welcome the concept behind this scheme, for which I have argued for many years. However, will the Minister explain to the House why the current system was built in the way it was? What was the justification for the existing system? Historically what arguments have been deployed against the arrangements that he now seeks to introduce?
That question goes back into history a little. The legislation was introduced originally in 1973. At that stage neither the hon. Gentleman nor myself were Members of the House. In those days I was not in the habit of reading Hansard to see what was happening in a body of which I was not a Member. However, I am grateful for the hon. Gentleman's welcome for the legislation, in which he is joined by many other people in the country who feel that it is a good development.
Although the scheme for annual accounting is not being introduced until the summer of 1988, information will be available on a broadly similar time scale. An information sheet will be available in local VAT offices at the end of May, and a public notice, including a tear-off application form, containing the conditions for using the scheme, will be available after Royal Assent. The cost of cash accounting is a once-and-for-all loss of about £100 million, with on-going annual costs of £10 million. The revenue cost of annual accounting is broadly neutral. I should report to the Committee on the Community derogation, about which my right hon. Friend the Chancellor spoke in the Budget debate. For cash accounting, the Government acted urgently on Budget day by lodging with the Commission of the Community a formal request for the necessary legal derogation, with the proposed operative date of 1 October 1987. There has been no suggestion that the Commission sees any significant difficulties with the proposal and the Government are optimistic that it will take the next step of formally notifying other member states shortly. If, within two months of that notification, neither the Commission nor any member state requests that the matter be raised by the Council, the approval will have been obtained. In summary, there are rare occasions in ministerial life when one can lay proposals before the Committee which enjoy widespread and even possibly universal approval.Now that the Minister has dealt with the details, perhaps I can ask him just one detailed question that he might care to answer. It concerns those people who opt to take cash accounting and, for some reason, have one year with a very high turnover, which is different from their normal expectations. Would those people automatically go out of the scheme, or would there be some discretion? The Minister seemed to suggest the possibility of some discretion.
It may help the right hon. Gentleman if I state what is contained in the regulations in that regard. The draft regulations have been placed in the Library. The regulations state:
Clearly, if he goes above £312,500, and is not expecting to come below it again and to go back to the original figure, he has that freedom. I repeat that the regulations state:"(2) A person admitted to the scheme shall remain in it for a minimum of two years, unless:(a) at the end of any quarter or prescribed accounting period his turnover in the year then ended has exceeded by 25 per cent. the figure of £250,000 and in the year then beginning is expected to exceed the figure of £250,000, in which case he shall notify the Commissioners and leave at the anniversary of his joining; or (b) if at any time there is reason to believe that his turnover in the year ahead will exceed by 25 per cent. the figure of £250,000 in which case he shall notify the Commissioners who may require him to leave the scheme at the end of the next accounting period."
Under those circumstances, he would have to leave the scheme. However, if he expected his turnover to go back below £250,000, he could remain within it. In summary, as I was saying, there are rare occasions when one can lay proposals before the Committee of the House, which enjoy widespread or, even possibly, universal approval. Those outside bodies that approved the original principle of cash accounting in the consultative document have a fortiori applauded the extension and expansion of that principle that was made by my right hon. Friend the Chancellor in his Budget. In particular, small business federations, institutions, organisations and lobbies have been generous in their praise of my right hon. Friend's imaginativeness and helpfulness. Those of us who have run small businesses and been responsible for payrolls and answerable for profits, and who have run them for enough years to have had to have lived with the consequences of our actions, and who have had the time to experience both the downs and ups of what the textbooks of one's youth called the "business cycle", know just how significant and beneficial for small businesses is the change to cash accounting for VAT. I have been heartened that my hon. Friends, who follow this scene closely and who have done so much in an informed and reasoned way to advance the small business cause, have been so enthusiastic about the difference that the schemes will make. As they know, anything that makes life simpler for small businesses is potentially good for jobs. Such knowledge of how a small business works was not shared by Opposition Members who, in a purblind way, said that there was nothing in the Budget for the unemployed, in bright and blissful ignorance of how 1 million jobs have been created in the economy during the past four years, and by whom. The measured reaction of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), 24 hours after the Budget, when he demonstrated total confusion between cash accounting and partial exemption, suggests that Opposition Members do not understand VAT either. The preternatural interest that Opposition Members have latterly been taking in the subject of VAT might usefully have been taken earlier in the interests of good opposition. I appreciate that cash accounting and partial exemption are complicated and esoteric subjects, difficult to grasp readily, but it is as well for this country that the right hon. Member for Sparkbrook, will never have to grasp them in government. Apart from the trumpet's uncertain sound from the Opposition, these provisions have been widely welcomed by the rest of the nation, and I commend them to the Committee."in the year then beginning is expected to exceed the figure of £250,000".
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I think that the Minister may regret his peroration when we come to deal with partial exemption later in our debates. We shall be putting certain matters to him that will demonstrate an adequate grasp of the difference between partial exemption and cash accounting.
Clause 11 has a history that goes back beyond the VAT review for small businesses, which was published in October 1986. When considering the Finance Bill of 1985, in a debate on cash accounting initiated by the Opposition, my hon. Friend the Member for Workington (Mr. Campbell-Savours) spoke eloquently in favour of it. At that time Ministers were much less certain about the benefits of cash accounting. It would seem that the reason for their change in outlook between 1985 and now is the draft 22nd directive from the EEC Commission. That draft directive asked for cash accounting for small businesses, and it was following its publication that for the first time there was a VAT review for small businesses, which called also for cash accounting. It is correct, as the Minister has said, that the Commission suggested a limit of £100,000 on the turnover of small businesses, which the Government have upped to £250,000. We welcome the clause and the uplift, and we shall be supporting the clause because of the help that it gives to small businesses. However, certain specific questions arise from the manner in which the Government have introduced the clause, and these I shall put to the Minister. First, will the Minister tell me how many firms will be involved in cash accounting? How many, potentially, which have a turnover of less than £250,000, could opt for it? I should like to know also how many firms have turnovers of more than £100,000 but less than £250,000? In other words, how many firms will be affected by the Government's uplift of the EEC's recommendation? Secondly, the Minister has said that on Budget day the Government made an application to the Commission for derogation from the sixth directive. Will he confirm that and tell me when he expects the derogation to arise? Until the EEC has given permission for there to be a derogation from the sixth directive, the change to the VAT rules in clause 11 and the regulations promulgated under it cannot take effect. Thirdly, will the Minister tell me whether he expects any difficulties with the Commission arising from the different limit on turnover that has been recommended by the Government as opposed to the EEC? Fourthly, will he tell me how a loss in VAT revenue will arise at the end of the first year of the implementation of the system of about £100 million and only £10 million thereafter? I am sure that there is an adequate explanation, and it is as well that we are aware of it when we are debating a system that involves such large sums for the Revenue. Finally, now that the Minister has acceded to the pressure that came as much from the Opposition Benches as from the Government Benches for cash accounting for small businesses, is he prepared to accede to the request that came last year and the year before that for some power of mitigation within the new system of VAT penalties? There is much concern among small businesses on this score. I shall be grateful if the Minister will respond to that and to my other questions, bearing in mind our welcome for the clause overall.The Minister was right to say that the proposals have been welcomed by Conservative Members, by the Opposition and by alliance Members. I know that the implications of cash accounting for bad debts will be welcomed by many small businesses. The downturn in North sea oil activity, for example, has led to an embarrassing amount of bad debt, and the VAT implications have been potentially quite serious.
It is right that the clause should be welcomed. but I should like to know why, when representations were being made on behalf of individual companies that were facing difficulties—I do not wish to be churlish—it was not possible to say that the change would be introduced at the earliest opportunity. Like the hon. Member for Workington (Mr. Campbell-Savours), I am puzzled by the delay that has taken place in introducing it, but it is only right that it should be welcomed. I should like to know also whether, in interpreting the regulations, any distinction will be drawn between the balances of businesses opting for cash accounting or annual accounting. Depending on the sector in which a business operates, it is possible for a business mostly to recover VAT. I trust that that will still be allowed and that there will be even greater advantages for businesses that essentially recover VAT. The ability to recover it at an earlier stage will be beneficial to cash flow. It will be helpful if the Minister will make clear that no distinction will be drawn. The questions that I would have asked about cash accounting have essentially been asked and dealt with, and I merely say that in this context there is likely to be a welcome benefit for small businesses. Much more radical reforms of VAT could still be introduced. First, the overall threshold could be raised to a much higher level. Secondly, we should explore the possibility of abolishing VAT on inter-business transfers. Such a step would radically simplify the administration of the system. Administrative burdens are a major problem for small businesses. In response to the Minister's attack on those who occupy the Opposition Benches, I wish to say that before I was elected to the House of Commons I was involved in running small businesses on behalf of others, and once on my own account. I am well aware of the real practical problems that are faced by a business that employs two or three people when it has to administer and handle VAT. The simpler the administration can be made, the more a business can concentrate on making and selling its products or services. I hope that the Minister, satisfied though he may be that this measure has widespread support, will not let up and will pursue further every way possible of simplifying the administration and lifting the burden that falls on small businesses. None the less, the measures that are before us are welcome and will be helpful.
The hon. Member for Sedgefield (Mr. Blair) has asked a number of questions which I shall do my best to answer. First, he asked how many firms would be involved that would normally be within the threshold of £250,000. The answer is 840,000 out of a total of 1.49 million VAT traders.
The hon. Gentleman went on to ask me how many I thought were likely to take up the new system. That is to some extent a conjectural question until there is a take-up, but there had to be a calculation to ascertain the cost tht would be incurred as a result of introducing the system. After we have eliminated the repayment traders, to whom I shall return in response to the intervention of the hon. Member for Gordon (Mr. Bruce), and those governed by the retail trading scheme, which effectively have had similar benefits historically, we are left with about 300,000 traders who are potential candidates for the scheme. We are expecting that about 200,000 traders will take advantage of the scheme. That is our best estimate. The hon. Member for Sedgefield asked me for percentages. My recollection is that the limit of £250,000 involved just under 65 per cent. of all traders—that is, 840,000 against the total—and that 44 per cent. of all traders—in other words, about 660,000 — were involved in terms of the original £100,000 limit. The hon. Gentleman asked whether the Government sought and applied for a derogation on Budget day. I said so in my introductory remarks, and added that we were encouraged to believe that there had been no suggestion that the Commission saw any significant difficulties with the proposal. That includes the proposal of the new limit that we have set. The Government are optimistic that the next step of formally notifying other member states will be taken very shortly. If within two months no member state or the Commission requests that the matter be raised by the Council, automatically the approval will have been obtained. Assuming that the Commission circulates it in the near future, we are looking to early July when we might expect, assuming all goes well, that the derogation had been obtained. The hon. Member for Sedgefield asked about the cost of £100 million in the first year and £10 million in subsequent years. The cost is effectively a cash flow cost, because all we are doing is delaying the taking in of the money. On the figures that I quoted, we estimate that in the first year, when the main bulk of traders will come into the scheme, we shall defer about £100 million of revenue into subsequent years. In subsequent years new traders, and other traders who did not register in the first year, will come in. We will lose some bad debt money because bad debt relief will be furnished through this scheme in the way that I suggested. Finally, the hon. Gentleman asked about mitigation. I have confirmed on many occasions, and my right hon. and hon. Friends have likewise confirmed, that the working of the penalty and surcharge regime will be reviewed in advance of the 1988 Budget, in the light of a decent span of experience. The scheme will be examined and, assuming my right hon. Friend the Chancellor brings in the 1988 Budget, we will report on the result of that review. The hon. Member for Gordon asked whether the repayment would be better for those engaged in cash accounting or annual accounting. The cash accounting principle will apply when traders making returns pay their bills, as well as when they receive money. In the normal course of events, it will not be of interest to repayment traders because they have the advantage of earlier payment or earlier receipt of money under the present arrangement. Repayment traders would normally not be part of the annual accounting scheme because they would be advancing money even earlier than it would normally be received. The regulations for annual accounting will not come out until the spring of next year, but we do not envisage that repayment traders will be included in them. The hon. Member for Workington (Mr. Campbell-Savours) intervened to ask about the history. I have not been able to receive advice on the detailed debate in 1972, but there is no evidence that cash accounting was a strong runner at that time. I was not a member of the Finance Bill Standing Committee in 1985, so I am grateful to the hon. Member for Sedgefield for having described the contribution of the hon. Member for Workington. It sounds as though cash accounting was a late runner in the stakes, rather than running the whole time.I rise to intervene because this is one of a number of initiatives that I have been asking to have reformed since I was elected in 1979. I hope that the Minister will ensure that small businesses understand the effect of this clause. It will mean that instead of delaying invoices—as invariably small businesses do to avoid making substantial payments in a particular quarter—if there is a sudden blip in their supply arrangements, they will be able more efficiently and accurately to keep records and send invoices in the knowledge that they will not he affected in the way they previously would have been.
I remember very well that, on occasions, one delayed invoices because one was concerned that substantial debt to the Exchequer would be incurred because of the rules as they existed in the early 1970s. It is important that small businesses get the message clearly that, if they use this system correctly, it will benefit them substantially.Question put and agreed to.
Clause 11 ordered to stand part of the Bill.